Like its homologs in higher eukaryotes, the U2 snRNA in Schizosaccharomyces pombe is transcribed by RNA polymerase II and is not polyadenylated. Instead, an RNA stem-loop structure located downstream of the U2 snRNA coding sequence and transcribed as part of a 3' extended precursor serves as a signal for 3'-end formation. We have identified three mutants that have temperature-sensitive defects in U2 snRNA 3'-end formation. In these mutants, the synthesis of the major snRNAs is also affected and unprocessed rRNA precursors accumulate at the restrictive temperature. Two of these mutants contain the same G-to-A transition within the pac1 gene, whereas the third contains a lesion outside the pac1 locus, indicating that at least two genes are involved. The pac1+ gene is codominant with the mutant allele and can rescue the temperature-sensitive phenotype and the defects in snRNA and rRNA synthesis, if overexpressed. In vitro, Pac1p, an RNase III homolog, can cleave a synthetic U2 precursor within the signal for 3'-end formation, generating a product that is a few nucleotides longer than mature U2 snRNA. In addition, U2 precursors are cleaved and trimmed to the mature size in extracts made from wild-type S. pombe cells. However, extracts made from pac1 mutant cells are unable to do so unless they are supplemented with purified recombinant Pac1p. Thus, the 3' end of S. pombe U2 snRNA is generated by a processing reaction that requires Pac1p and an additional component, and can be dissociated from transcription in vitro.